To see the future of China – or at least, the version its leaders would like to create and the world to view in awe – you must head not to Shanghai or Beijing, but to a vast confluence of connected cities in the south.
For decades, this region was known as the Pearl River Delta, or PRD. If global investors thought of it at all, it was to visualize a hodgepodge of factories that sucked in cheap mainland labour and spat out everything from shoes to iPhones. When bankers visited, which was often, they would linger in Hong Kong and Macau, two cosmopolitan cities at the mouth of the delta, occasionally venturing across the border.
Working capital flowed north, and the wealth generated in the delta was used to buy Hong Kong property or spent in Macau’s casinos. But queues at checkpoints could be interminable and transport links were patchy, while investors had to handle three different currencies, legal systems and ID schemes, not to mention two languages. None of it was in any way frictionless.
Sometime this summer, probably August, Party leaders in Beijing are set to publish their plans for the Greater Bay Area. This will be no run-of-the-mill economic zone, nor an effort to link China’s poorer centre with its richer coast, but a concerted attempt to bind together the financial and commercial economies of Hong Kong and Macau with nine mainland cities, including Guangzhou and Shenzhen
It is a big step into the unknown.
Pedro Cardoso, chief executive of Macau’s Banco Nacional Ultramarino (BNM), describes it as “one of China’s key ambitions over the next five years”, and a project with the highest political priority.
Nothing about the Greater Bay Area, which many see as an attempt to replicate and even supplant Silicon Valley, is small.
Lying at the heart of Guangdong, China’s richest province, the region has more people than the UK, and an economy bigger than Australia’s. Its combined GDP, including the two offshore cities, is tipped by law firm King & Wood Mallesons to triple to $4.6 trillion by 2030, overtaking Germany.
The bay area is home to two genuinely global corporates – Huawei and Tencent – and three of the world’s busiest ports and airports. The area accounted for a quarter of all mainland trade in 2017 and has, since 1980, soaking up more than $1 trillion of inward investment.
McKinsey Global Institute predicts it will contain the world’s largest banking cluster by 2025, generating total annual revenues of $185 billion, ahead of Beijing, Shanghai, Tokyo and São Paulo.
Even a once-jarring lack of fast, efficient transport links is being fixed. When it opens on July 1, a sea bridge linking Hong Kong with Macau will slash journey times to 30 minutes, from three hours, while a $10.7 billion high-speed rail line will cut travel time between Hong Kong and Guangzhou to under an hour. Authorities on both sides have worked hard to cut waiting times at borders for business travellers.
To Hong Kong’s busy bankers, time is the biggest factor at work here.
Helen Wong, chief executive, Greater China at HSBC, says she crosses into the delta area at least once a month to visit clients or check in on the bank’s physical operations. The UK lender has 64 outlets in Guangdong province (out of a mainland total of 178) and owns a 51% stake in HSBC Qianhai Securities, which opened for business in December 2017 in the Shenzhen economic zone of the same name.
Helen Wong, chief executive, Greater China at HSBC
“When I visit our Qianhai office, it takes me an hour – less when the traffic is good,” she says. “Central Hong Kong to the western border crossing is 30 minutes, max. Then it’s 35 minutes to Qianhai. It’s not totally seamless yet, but it’s getting there.”
Other Hong Kong bankers seem to spend more time on the far side of the border than they do at home.
When Asiamoney meets Adrian Li, deputy chief executive of the Bank of East Asia, on a hazy Thursday afternoon in Hong Kong, he has to pause to remember how many times he has crossed into Shenzhen that week.
“Three times,” he says finally. “This is starting to become the new normal for me: one day playing golf with clients, the next day a trip north for a business dinner, and then a day of meetings.”
If there is a beating heart to the Pearl River Delta and its heir-apparent, the Greater Bay Area, it is probably Shenzhen.
Hong Kong remains the region’s financial powerhouse. In the current decade to the end of May 2018, only New York’s NYSE completed a greater volume of IPOs than Hong Kong’s stock exchange, according to Dealogic. Hong Kong topped the global rankings in four out of the last eight full years, and recently tweaked its rules to attract more fintech and biotech listings from the mainland.
Investors still love the city’s common law legal system and sound banking system.
Nicholas Yang, Hong Kong’s secretary for innovation and technology, is keen to underline the city’s enduring attraction to the financial community.
“Eighty of the world’s top 100 banks are here,” he says at his government offices on Tim Mei Avenue. “So are all the world’s big insurers. The stock exchange’s market cap is 13 times GDP. We dominated the IPO scene for the past five years, and we will dominate for the next five. Why? Because investors trust us.”
But Shenzhen is special in a different way – and has been ever since the day in 1992 when China’s great moderniser, Deng Xiaoping, paid a visit to the patch of paddy fields and low-rise concrete on Hong Kong’s doorstep. When Deng urged locals to throw off the shackles of socialism, famously saying that to get rich is glorious, they listened.
Average salaries in its Nanshan district, home to 125 listed corporates with a combined market cap of $400 billion, are now higher than in Hong Kong. Shenzhen boasts 78 dollar-billionaires, according to Hurun’s 2018 Global Rich List, two short of its neighbour’s tally, and the same number of Fortune 500 firms.
Shenzhen’s success has never been down to size alone – though McKinsey expects it to be the world’s 19th largest municipal economy by 2025, worth $524 billion, with Beijing in fifth place and Shanghai in third. It is what the city does with it that counts. Local firms filed 45% of all of Chinese patents in 2017, according to the World Intellectual Property Organization. Over 4% of local GDP is spent on research and development (in Nanshan, the share is 6%), against a nationwide average of 1.8%.
What this fishing village-turned-megacity has done so well, having been granted a generous head start by Deng, is to have the sense and the ability to maintain its lead. The Shenzhen Stock Exchange, which opened in 1990, has completed more IPOs this decade than either Singapore or Sydney, while its Bond Connect programme gives international investors access to China’s $9 trillion debt market via Hong Kong Exchanges and Clearing.
In PwC’s ‘Chinese cities of opportunity 2017’ report, Shenzhen and Guangzhou topped the rankings, leading in eight out of 10 categories, including ease of doing business, intellectual capital and financial innovation.
Travelling to Shenzhen always seems like a new experience. Ten years ago, crossing into the mainland from Hong Kong still felt like stepping back in time, from the new world to the old. Now, you have the reverse feeling. Hong Kong’s light rail system accepts cash or a single method of contactless payment, while its cab drivers only take notes and coins. Compare that with Shenzhen, where many taxis are cash-free zones, accepting payment in the form of a smartphone-generated QR code.
Shenzhen Bay VC&PE Tower is located in western Shenzhen, a half-hour drive from the checkpoint at Lo Wu. A nondescript glass tower in the Silicon Valley style, it is dwarfed by Tencent’s new headquarters, which loom over the area like a tripod in the film ‘War of the worlds’.
Raymond Chen is waiting patiently on the 10th floor. A wiry and intense investment banker, he spent most of the last two decades in Hong Kong at the likes of Citi and Barclays, before accepting the position of chief strategy officer at Hande Finmaker, a local fintech accelerator and consultancy.
The Chinese authorities thought we were wolves, but after we had been there for a while, they realized we were not big bad wolves but cute little sheep- Christine Ip, UOB
It seems pertinent to ask Chen, whose CV includes a five-year stint at Hewlett-Packard in Palo Alto, to validate or refute a few of the myths and truths that already cloak the Greater Bay vision. What does Beijing really want to achieve here – and for that matter, Hong Kong too? Why give it a new name – what was wrong with calling it the Pearl River Delta? And can it really rival Silicon Valley?
“It’s not the Bay Area now, and I doubt it will be the Bay Area for some time,” he replies. “Shenzhen isn’t San Francisco and Nanshan isn’t Silicon Valley. But that’s not to say it cannot become something greater than either in the longer term. Shenzhen is a fantastic fintech hub, probably the best in Asia, and it is a melting pot for great technical Chinese minds. Any technology destined to change China’s financial economy and probably the world’s – chances are it will be invented here.”
What Shenzhen does have, he says, is a government whose corporate sensibilities and activist nature should be presented as a case study in business schools. “Shenzhen’s city government is probably the richest in China thanks to the number of listed and unlisted technology firms,” he says. “It is picky about which graduates it grants a hukou” or residency permit. “They don’t take people over 45 and won’t pay retirement costs, so it has a very low debt burden.
“But it is willing to put its money to work for the right cause. So when a drone-maker called DJI got in financial trouble, the government knocked on the door and asked if they needed any money. It has since transformed itself into a kind of venture capital investor, and it’s proud to have funded so many young Shenzhen firms. You aren’t going to find a more business-friendly government in China.”
DJI Technology is a compelling case study in itself, and one that explains so much of Shenzhen’s success.
Head-quartered in the nearby Skyworth Semiconductor Design Building, DJI, like one of Chen’s former employers, was founded in a tiny room by entrepreneurs with a vision. The only difference is that while Bill Hewlett and Dave Packard formed HP in a garage in Palo Alto in 1938, Frank Wang’s breakthrough took place in 2006 in his dorm room at Hong Kong University of Science & Technology.
The Hangzhou-born Wang pitched the idea of making drones to the college, which shelled out a $2,300 grant. He launched his first product in 2009 and now controls 70% of the global non-military drone market. In March 2018, Wang set out to raise up to $800 million in pre-IPO funding, valuing his firm at $15 billion. A stock listing is tipped to happen in 2019 in Hong Kong or Shenzhen. The 38-year-old is China’s youngest technology billionaire, with a fortune of $5.6 billion, according to Hurun.
Profitable, ambitious, valuable, fast-growing, locally based but with offices in the US, Germany and Japan and with a cash-hungry business model, DJI ticks so many boxes for foreign lenders. It is an important client for HSBC – the biggest international bank in mainland China as a whole and in Shenzhen itself, where it has 19 branches, the first of which opened for business in 1984. That compares with 14 at the Bank of East Asia and six at Hang Seng Bank.
It’s hard to overstate how important the area is to the likes of HSBC. A powerhouse in Hong Kong, where it generated $9.6 billion in pre-tax profit in 2017, more than half of it from retail banking and wealth management, its future lies in China. And to crack China, it has to crack Shenzhen and the rest of the Greater Bay.
Little wonder the mainland side of the delta is a source of such fascination to senior figures at the bank.
“It’s a very outward-looking and flexible place that endlessly innovates and incubates, and is focused on investing and producing and consuming,” says HSBC’s Greater China chief executive Wong. “I love working with high-tech corporates that proliferate [here], building electric cars, making cooking simpler, designing the robots of the future. These firms are what the Greater Bay Area is all about. It’s a microcosm of the economy China wants to create on a massive scale.” In the bank's latest strategy update, published June 11, it set out plans to generate $500 million in annual revenues from the Pearl River Delta by 2020, and to double that number in the medium-term.
To HSBC, the key to so many of its mainland plans go through Qianhai in Shenzhen. Its new securities JV will, says Wong, “help our offshore investor clients access China’s capital markets and help Chinese firms complete domestic IPOs, bond issuances or mergers and acquisitions”.
She describes the Greater Bay Area as a “cross-border business as well as a local one for us” and as a “springboard to expanding our retail and business banking services into other parts of the mainland”.
Wong adds: “The Greater Bay Area initiative will lead to far more cross-border opportunities, and that was what we were counting on when we planned our regional strategy. It is a very important part of our pivot to Asia.”
But the Hong Kong- and London-listed lender will soon face fresh competition from rival investment banks. In April, under pressure from the US, China’s central bank promised to allow foreign financial groups to buy majority stakes in securities, fund management, futures and life insurance companies “within a few months”, as part of president Xi Jinping’s pledge to open up China’s $40 trillion financial sector.
That’s great news for foreign institutions that have scaled back in the mainland, but less so for incumbent local and foreign lenders. Shenzhen is the richest big Chinese city, with per-capita annual income of $26,071 in 2017, according to the National Bureau of Statistics, ahead of Guangzhou in second place.
Guangdong, the province that contains both cities as well as the mainland portion of the Greater Bay Area, is in turn China’s largest and wealthiest, with an economy larger than Spain’s.
But that does not mean it will be easy for foreign lenders to make a buck here. Forty years after it started to open up to the world, Beijing hasn’t quite shed its fear of foreign banks and their ‘predatory instincts’. The likes of HSBC, the Bank of East Asia and Standard Chartered control just 0.74% of the onshore banking market, down from 2% a decade ago, according to Bloomberg Intelligence.
But the authorities have learned to co-exist, letting foreign banks incorporate locally, then allowing them to expand their remit.
“The Chinese authorities thought we were wolves,” says Christine Ip, who cut her teeth at HSBC and Standard Chartered, and who now runs Singapore lender UOB’s Greater China operations. “But after we had been there for a while, they realized we were not big bad wolves but cute little sheep.”
Christine Ip, chief executive, Greater China at UOB
For now, foreign banks, particularly those who see the Greater Bay as part of their backyard, are going all out. HSBC’s Guangdong loan book grew 23% year on year in 2017, to $6.2 billion, during which it doubled its number of retail banking and wealth management clients.
In December 2017, outgoing group chief executive Stuart Gulliver said the bank planned to make a series of big-ticket investments in the area and to generate additional regional earnings of at least $1 billion in the five years to the end of 2022.
Longer term, HSBC aims to regularly generate north of $1 billion in annual pre-tax profit from the area.
“That’s a big number, and it’s hard to predict when we will reach it,” says Wong. “For now, we are focusing on investing in products and people, growing our cross-border business and making it easier to on-board clients and help them take out mortgages, loans and credit cards.”
The Bank of East Asia has appointed an ambassador in each of the Greater Bay Area’s nine mainland cities to “promote our business activities, helping us to identify and target the region’s best companies and higher net-worth individuals”, says deputy chief executive Li.
He believes there is still plenty of room to grow in the region: “Looking at private banking, our AuM (assets under management) in the [Greater Bay Area] makes up just 23% of our overall mainland AuM, and we would really like to double that share within three years.”
The Bank of East Asia doesn’t break down its mainland financials by regions, but it did report a profit there of $40.5 million in 2017, reversing a small loss the previous year. Customer deposits rose 9.9% to $25.4 billion, with total lending up 6.9% to $19.3 billion. Last year, the bank secured a licence to open a full-service securities JV in Qianhai, 49%-owned by the lender and set to open in late 2018.
“We are also opening a new mainland headquarters in Qianhai in the next three years, enabling our service operations on both sides of the border to work closely together,” Li adds.
So far, much of this article has focused on Shenzhen, and rightly so. The city is awash with capital and talent and home to the best lender (China Merchants Bank) and best corporate (Huawei, whose Silicon Valley-style campus boasts supermarkets, restaurants and a university campus offering 25,000 courses).
E.Sun Bank chose to locate its mainland offices in Shenzhen because the city was “innovative, booming, cheap, and near Hong Kong”, says Joseph Huang, president of the Taiwan lender.
How does the rest of the region fit into the wider scheme? That’s a tricky question to answer. A state-mandated attempt to transform a large swathe of its richest province into a cross between San Francisco, New York and Tokyo was probably inevitable at some point, given China’s modern obsession with development plans. To some, the Greater Bay is a test balloon for ‘Made in China 2025’, president Xi’s plan to move China up the value chain. The thinking runs: if it can work here, it can work anywhere.
But can it? This is a big unanswered question for Beijing. The original Bay Area developed organically, with San Francisco, Oakland and San Jose acting respectively as its main sources of finance, production and innovation. Together, they transformed the whole into more than the sum of its parts. It isn’t clear that this is either happening in China’s Bay Area, or is likely to.
Compared with the European Union, the big difference is that here there is much closer political integration- Pedro Cardoso, BNM
“My main concern is replication,” says one Hong Kong banker. He points to outlying cities like Dongguan and Zhaoqing. “They do the same things: light manufacturing, processing zones, making cheap goods. It’s Shenzhen 30 years ago, and it will take decades for some to move up the value chain.”
Dongguan’s economy is a third the size of Shenzhen’s, while Zhaoqing’s is one 10th. Not one of the Greater Bay’s lesser cities is home to a single fintech unicorn, though that may change.
Politicians have raised fears of overlap. Hong Kong’s chief executive, Carrie Lam, is an outspoken fan of the grand project and mentions it often. Others warn that inter-city competition and the relatively minor influence of the service industry (it accounts for 60% of regional economic output, against 80% in New York, San Francisco and Tokyo) could hold it back.
It’s also worth noting that regional power will be spread between Shenzhen, Guangzhou and Hong Kong, which could lead to conflict. More will become clear when Beijing unveils its hopes and dreams for a project that party leaders equate with its other big nation- and influence-building plans: the Belt and Road Initiative, Made in China 2025 and the globalization of the renminbi.
Open and shut
And so we wander back across the border and examine the Greater Bay’s final two cities. How will they benefit from the new development plan?
First to Macau, a spit of land once used by China’s emperors as a dumping ground for dead foreigners, which has been utterly transformed in the space of two decades. It’s no longer just a place for Hong Kongers to gamble and for mainlanders to recycle their cash, but a big entertainment venue in its own right. Macau’s hotels, like those in Las Vegas, are crammed with punters who also come to watch shows and frolic in water parks.
To the lenders who make a buck there, the case for the new scheme is open and shut.
“Because Macau is a global tourism destination, the free movement of people is very important to us, both as a bank and as a city,” says BNM’s Cardoso. “The Greater Bay Area will be very positive to society because it will promote the free movement of capital, people, goods and services.”
If that quartet of factors sounds familiar, it’s because they were first set out in 1957 by the EU in the original Treaty of Rome. Cardoso believes the Greater Bay Area will go one step further.
“Compared with the European Union, the big difference is that here there is much closer political integration,” he says. “This should accelerate the process and bring us even greater success.”
Then there’s Hong Kong. Without the full and willing participation of the former British colony, the Greater Bay Area would be just another super-sized Chinese development zone with Macau stapled on. That the plan’s mainland creators and promoters need Hong Kong is clear. It just isn’t immediately clear that Hong Kong, with its strong banking sector, common law system and thriving stock market, wants or needs it quite as much.
To be sure, you can be awed by the plan’s ambitions while deriding its blunt narrative. To some, the Greater Bay exists merely to justify yet more infrastructure spending.
Philippe Le Corre, an academic specializing in the business of government at Harvard Business School, sees it as Beijing’s latest attempt to “dilute Hong Kong’s importance into a vast economic zone where it is no longer the centre”.
But while much of the focus has been on the plan’s mind-boggling size, and on the benefits it will bring to many on the far side of the Chinese border, the Greater Bay Area may, for three reasons, be a blessing in disguise for Hong Kong.
The first reason is property prices. Never a cheap place to live, rental prices in Hong Kong are now the highest in the world. A Deutsche Bank report published at the end of May put the monthly cost of a two-bedroom apartment at $3,700.
Allan Zeman, chairman of Lan Kwai Fong Group, a property owner and developer, warns that prices have got out of hand and are starting to damage the economy.
“The fundamental problem with Hong Kong is that high prices are stifling innovation and creativity,” he says. “Having somewhere to live is a fundamental human right. Young people know they haven’t got a chance of renting or buying their own place, and they lose hope.”
There is a solution to this, say proponents of the Greater Bay vision: make it easier for Hong Kong citizens to buy property on the other side of the border. Better infrastructure and speedier border checks are integral parts of the plan, with rules likely to be relaxed to allow citizens to transfer cash easily from one side to the other.
Bank of East Asia
Another senior Hong Kong banker adds: “Think of the area in 10 or 20 years’ time. Travel time from central Hong Kong to Qianhai or Shenzhen will be counted in minutes. People will live on the other side of the border and travel to work in Hong Kong – it will all be far more seamless. This is our future.”
The second potential benefit for Hong Kong involves capital flows.
It’s hard to see how a free-trade zone worth trillions of dollars, which binds Hong Kong closer to some of China’s richest cities, biggest corporates and most ambitious tycoons, will fail to benefit the city’s banking and investment community.
“We have more than 500 mid-sized corporate clients in the Greater Bay Area,” says the Hong Kong country head of a big Western lender. “Many are among the most exciting firms in the world, typically growing on a revenue basis at upward of 20% a year. We know them, know their founders and their main backers, and have great relationships with them. They all want to grow, to do capital markets trades and to complete their IPOs in Hong Kong. The Greater Bay Area is one of the great opportunities for the banking sector, anywhere – period.”
And so to the third and final factor: financial technology. That Hong Kong is an Asian financial hub on a par with the likes of Singapore is a fact and one that is unlikely to change. It is home to large global banks, funds and private equity firms, and remains an integral cog in the world’s transport network.
Yet in fintech, it’s a laggard, trailing its neighbour across the border.
“Compare us to Shenzhen on fintech and we’re not in the race,” says one Hong Kong fund manager. “That’s going to come back to bite us at some point.”
Lan Kwai Fong’s Zeman, who sees the Greater Bay Area as “the future salvation of Hong Kong”, frets that China and more specifically Shenzhen are “so far ahead, it’s marginalizing us”.
Even specialists fear Hong Kong, at least in this corner of finance, has lost its way. Li, at the Bank of East Asia, compares “super-developed but perhaps less innovative” Hong Kong with a Shenzhen that is “hugely innovative but still developing financially”. Priscilla Ng, head of digital banking, Hong Kong, at Citi, believes her home town faces a “talent transformation challenge. We have always been great at nurturing banking talent, but less so at nurturing fintech talent.”
Yang, Hong Kong’s innovation and technology secretary, is quick to rebut any accusation of digital recidivism.
He says: “We are often called out for being behind the times with fintech as we don’t have Alipay or WeChat Pay,” the digital payment services invented by China-based Alibaba and Tencent respectively.
“Hong Kong has 13 active licences in place to e-payment providers.”
When pushed on claims that the city has been slow to embrace digital banking, he pushes back: “You talk about digital banking, but can the digital banks be trusted right now? I ask you whether you’d put all your money to work in digital banking? I wouldn’t. The problem is safety.”
Despite his qualms, there are signs that Hong Kong belatedly recognizes the threat to its local financial supremacy. In his 2018/19 budget speech, delivered in February, financial secretary Paul Chan pledged to invest HK$18 billion ($2.3 billion) in fintech, funding education programmes and breakthroughs.
Last July, the Hong Kong Monetary Authority launched its Fintech Career Accelerator Scheme, with the aim of convincing young graduates to pursue a career in the sector.
Despite Yang’s antipathy toward the breed, the HKMA is also set to hand out the first batch of licences to virtual lenders by the end of 2018. More than 50 players, from WeLab, backed by Hong Kong tycoon Li Ka-shing, to the Chinese trio of Baidu, Alibaba and Tencent, have shown interest in penetrating a big, rich market dominated by the likes of HSBC, Standard Chartered and Bank of China.
This will be no sandbox experiment: the regulator put the minimum capital requirement at HK$300 million and requires applicants to marry technology with traditional risk management. The battle for customers will be intense, bitter – and fascinating.
As will the battle for supremacy within the Greater Bay Area itself. The eyes of millions will scan the blueprint when it is published, keen to see what it entails, and how power will be apportioned between the 11 cities. Will Party leaders aim to encourage or dissuade inter-city competition? Will it seek to transform, say, Guangzhou into an entertainment hub to rival Macau, or elevate Shenzhen’s standing while diminishing Hong Kong’s?
And what does Beijing want the Greater Bay Area to become: a cross between Silicon Valley, New York and Tokyo that, in the words of UOB’s Ip, “has greater potential than the sum of its parts”, or just another very large trade zone bursting with good infrastructure? And how will it iron out some substantial problems, notably its dilemma of merging three different legal, cultural, political and financial systems? Only time will tell. But the journey will be interesting.